The Canadian Dollar started 2026 on a low note, dropping against most major currencies, except one. Sentiment for the new year is slightly positive, but progress is slow. After the holiday break, the Canadian Dollar opened sluggishly, staying within near-term ranges.

Impact of Canadian Manufacturing’s PMI

The Canadian S&P Global Manufacturing PMI showed a drop in activity for the eleventh month in a row, mainly due to tariff-related issues. These tariffs are making it hard for Canadian businesses to operate, which leads to cautious inventory management and rising input costs. This uncertainty is a continuing worry for Canadian businesses. The Canadian Dollar fell slightly against the US Dollar, with market visuals showing little change. Ongoing tariff concerns affect both Canada and the US. Although US manufacturing improved at the end of 2025, worries about ongoing cost pressures and decreasing orders could affect sustainability in early 2026. Key data releases, including labor reports from both countries on December 9, will be very important this year. The USD/CAD traded above the day’s opening with some daily bullish trends. However, technical indicators suggest possible gains, even though slower momentum could limit upside potential. On a daily basis, USD/CAD remains below important EMAs, indicating a bearish trend with pressure to go lower. Currently, sellers have control over the market. The Canadian Dollar has started 2026 weakly, reflecting struggles in the manufacturing sector toward the end of 2025. Ongoing tariff uncertainties are limiting business activity and pushing up costs. This fundamental weakness suggests that any gains for the Canadian Dollar may be temporary.

Upcoming Canadian Labor Report

Next week, we will see important labor reports from both Canada and the US. Economists expect Canada added only 5,000 jobs in December, a significant drop from the 25,000 in November 2025. A weak jobs report from Canada, especially if paired with a strong report from the US, would likely raise the USD/CAD exchange rate. We also need to think about monetary policy. The Bank of Canada kept rates steady in December 2025 due to concerns about supply chain issues. In contrast, the US Federal Reserve’s December meeting minutes indicated a continued focus on inflation. This difference in policy is currently boosting the US dollar. With the short-term upward trend, buying near-term USD/CAD call options that expire after next week’s employment data may be smart. If the data confirms soft Canadian economic conditions, we might see a move toward the 50-day moving average around 1.3850. This approach lets us take advantage of possible gains while managing our risk. However, the longer-term daily chart still shows a bearish trend for USD/CAD. If any rally stalls near the 50-day moving average, it could be a good time to consider bearish positions. We might look at selling call spreads or buying puts to align with the broader downtrend that was evident throughout much of the fourth quarter of 2025. With significant data coming soon, we can expect increased price volatility. Implied volatility for one-week USD/CAD options has already risen to 8.5%, indicating the market is preparing for a major move. Buying a straddle would allow us to profit from a sharp price change in either direction following the employment reports. Lastly, we cannot overlook oil prices, which significantly influence the loonie. WTI crude oil is around $72 a barrel, providing little support for the Canadian currency. This weak commodity backdrop reinforces caution about the Canadian dollar in the upcoming weeks. Create your live VT Markets account and start trading now.

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